Alex Blaze

IRS to Require Income Splitting for Same-Sex Couples

Filed By Alex Blaze | March 03, 2011 9:30 AM | comments

Filed in: Politics
Tags: domestic partnership, income, income splitting, marriage, taxes

The IRS has instructed same-sex couples that are DP'd, CU'd, or married in community 1040.jpgproperty states (Washington, California, Nevada), to start income-splitting, i.e. averaging the incomes while filing separately. The Sacramento Bee reports that this will increase some people's tax burden and lower others', but only provides and example of the latter:

In an example cited by Lambda officials, a hypothetical couple where "David" is an attorney earning $225,000 and "Richard" a librarian with $20,000 in income, will see a combined savings of $6,824 in taxes.

It's an interesting example that represents a small part of the American population (read: Lambda Legal's donors and associates). Couples with large disparities in incomes are the couples that benefit the most, which makes sense considering how income-splitting was created in 1948 when women were expected to stay home while men earned the income. It's a subsidy to help keep women out of the workforce.

One way to look at it is a tax incentive that encourages people to not work; another way is as a tax shelter for someone's higher income. In order to keep half of one person's income out of higher tax brackets and puts it in lower brackets. Of course, like every tax break, it must be funded by the rest of us with overall increased tax rates or cuts in spending, so it's an effective transfer of wealth. It's nice that same-sex couples in three states can now access that tax break, but maybe, in 2011, the tax break should just be eliminated.

As for how much partners who earn about the same amount of income will have to pay, I'm not sure and I'm not finding any answers. I'm guessing the domestic partners who file will still be filing as single people, not "Married Filing Separately," which means that they can still apply for the Earned Income Tax Credit, right? The Sacramento Bee doesn't say, although it does say that "for others, they'll pay more in taxes" as a result of the new rules.

But the Bee says in the lede:

Many same-sex couples in California are getting a tax break this year from the IRS, according to new requirements to report their combined income on federal tax returns.

No mention of the people who will pay more as a result of the rules.

The Lambda attorney quoted said it'd save money:

Peter Renn, a Los Angeles-based Lambda attorney, hailed the new IRS requirement as a money-saver for many same-sex couples, as well as another step to "move the ball forward" in recognizing their rights.

Yes, but if you're forced to pay higher taxes for this step, the fact that it moves the ball forward will be cold comfort.

Perhaps another example will help. Imagine Linda, who earned $11,000 in 2010 as a part-time cashier, and Jessica, who cleans hotel rooms as an independent contractor (1099) and earned $10,000. Linda has two children from a previous relationship; the father is long gone and not helping with the kids. They're domestically partnered in Washington. Any takers?


Recent Entries Filed under Politics:

Leave a comment

We want to know your opinion on this issue! While arguing about an opinion or idea is encouraged, personal attacks will not be tolerated. Please be respectful of others.

The editorial team will delete a comment that is off-topic, abusive, exceptionally incoherent, includes a slur or is soliciting and/or advertising. Repeated violations of the policy will result in revocation of your user account. Please keep in mind that this is our online home; ill-mannered house guests will be shown the door.


Don Sherfick Don Sherfick | March 3, 2011 10:14 AM

Alex, I may have missed something here, but I'm a little confused. So long as DOMA is applicable and defines "spouse" for federal/IRS purposes as only a man and a woman, where do they get the bit about allocating income as community property, which I believe is solely a "marital property" concept? Especially where the two incomes are coming from two employers and not some kind of internal business dealings of the couple itself?

This is similar to rules last year just for California, and the WSJ wrote about it then:


The pair wed during a brief window when same-sex marriage was legal in California, but the issue arises because the men are registered as domestic partners. Same-sex couples, even if they are legally married in their home states, may not file joint federal tax returns. The federal Defense of Marriage Act, passed in 1996, defines marriage as between one man and one woman and bars federal agencies from interpreting it otherwise.

But the tax issue is more complicated in California, one of nine states with community-property rules. Those rules require married couples to treat all income as joint property for a variety of purposes. If they are filing taxes separately, the Supreme Court has said they must combine their incomes together and then divide the sum equally.

Beginning in 2005, California law directed that these same community property rules apply to registered domestic partners.

But the tax issue is more complicated in California, one of nine states with community-property rules. Those rules require married couples to treat all income as joint property for a variety of purposes. If they are filing taxes separately, the Supreme Court has said they must combine their incomes together and then divide the sum equally.

Beginning in 2005, California law directed that these same community property rules apply to registered domestic partners.

http://online.wsj.com/article/SB10001424052748704080104575286931017169308.html?mod=googlenews_wsj

My guess is the IRS took the ruling that requires income splitting in states with community property for couples that are Married Filing Separately to mean that state community property laws define for the federal government who is earning what. It's a way to work around DOMA that I've heard about before (like claiming a partner's child as one's own even if the marriage isn't recognized).

I know that CA and WA's DP's were "Everything but the M-word" laws, so community property is apparently part of DP's there.

What is missing from the CA story is that California's Domestic Partners Law did not always consider the assets of Registered Domestic Partners Community Property. I do remember a story out of CA about a sizable number of Domestic Partners dissolving their domestic partnerships before the community property provision / revision to the CA DP Law was to go into effect (around 2007).

Three things:

1. More likely than not, the tax returns of registered Domestic Partners in CA will be further complicated by the fact that they can only "income split" from the date (2007?) that the community property provision / revision to the DP Law in CA went into effect. AND,

2. Since income splitting by CA registered domestic partners did not became a requirement by the IRS until 2010, registered domestic partners in CA, more likely than not, will be required to file revised tax returns from 2007 (if they were registered since 2007) to comply with the IRS decision on income splitting.

3. Also, more likely than not, domestic partners with large disparities in income were the exact couples who dissolved their partnerships rather than allow the high income earner's assets to become community property.

If you were a wealthy Gay Man in California in 2007 (a state which did NOT recognize palimony for gay couples), how likely was it that you would have just set back and watched half your net worth "essentially" go up in smoke? By the same argument, if you are a wealthy Gay Man in CA, how likely are you to register as a domestic partner with someone when you know your assets will become community property?

Thanks for the background. And good point - "Richard" isn't just sheltering his income from taxes with "David," he's basically transferring that wealth to him. Which is fine if they stay together forever.

the quoted WSJ story about CA Registered DP income becoming community property in 2005 seems to be in error.

"On September 29, 2006, California enacted Senate Bill 1827. Senate Bill 1827,
effective January 1, 2007, repealed CFC section 297.5(g), which provided that earned
income was not to be treated as community property for state income tax purposes.
Consequently, as of January 1, 2007, California treats the earned income of registered
domestic partners as community property for both property law purposes and state
income tax purposes." http://www.irs.gov/pub/irs-wd/1021048.pdf

John Gagon | March 3, 2011 3:26 PM

The IRS is now promoting the "Sugar Daddy - Sugar Baby Tax Break!" Find yourself a bird cage guy and save!

"One way to look at it is a tax incentive that encourages people to not work; another way is as a tax shelter for someone's higher income. In order to keep half of one person's income out of higher tax brackets and puts it in lower brackets. Of course, like every tax break, it must be funded by the rest of us with overall increased tax rates or cuts in spending, so it's an effective transfer of wealth."

"encourages people not to work"?

Good grief Alex, it allows one partner to stay home and care for an ailing parent, or young children. GE and Exxon and BOA paid NO taxes last year, and you're worried about a couple saving $6 grand. Holy crap.
And the only transfer of wealth in this country is from us peons to the top 5%.

My sense is that more families will be helped by this than have to pay more taxes, time will tell. Those high earning double income families that may end up paying more can always choose to see it a a trade off for the expanded protections that come with DP/marriage recognition or they can choose not to enter a state recognized partnership if it means that much to them. I know plenty of heterosexual couples that choose not to marry. Have I missed all your previous posts about the higher taxes single people pay in general? Are you in favor of an individually assessed flat tax for everyone and against all "wealth transfers"/progressive taxation as a matter of principle? Can you just not see any way at all to be glad that some same gender couples might be getting a bit of long overdue almost equality?

Let me tell you that the wheels of justice are moving here, but slowly. I would much rather be filing as married filing jointly. It'd be a lot simpler. As it is my wife and I have been advised to make spreadsheets of our income going back to 2007, write all kinds of explanatory letters to go with our separate returns, and hire an expensive accountant to help us with our very basic returns in the likely event they will be challenged. Whoopee, we're sure looking forward to that. And, get this, as the non earning "tax shelter" (could you be more disrespectful of my contribution?) in our marriage I've been told that I will have to pay thousands of dollars up front in taxes owed when I file my returns, even though my wife has already paid way more than the amount we both owe, AND I've been told that I can expect to be be assessed penalties, with interest for 2007-9, for not having filed a return back when it was against the rules! Hence the need for professional help.

Yes, we do hope to get a nice amount of money back, eventually. It is OUR money and it's been unjustly impounded all these years is how I see it. We won't be getting it back with interest, that's for sure. We've been together 22 years, supported each other through thick and thin, taken care of each other in sickness and health, raised and educated a daughter, cared for our grandchildren, all while receiving none of the tax relief that heterosexual married families get. I am talking about well over six figures here. We will be lucky if we get 15% of it back under these new rules. We are not rich people, our income is finally just below the median for our area. We are doing as well as we now are because of overtime.

Being over taxed for all these years has meant not being able to buy a home, save as much for our for old age, help our daughter more with college, provide enough special tutoring for our learning challenged grandchild, buy special care I need for health problems.

What feels so vexing Alex, is that when you reduce my contribution to my families well being to the status of "tax shelter", it implies that I don't work in any meaningful way, don't deserve an ownership stake in our families income, and that my family is not a real family deserving of equality. How sad. Maybe you are unfamiliar with the community property concept? I don't know where you live. I grew up in a community property state and long ago decided I would never live anywhere else, for fairness sake, because I believe marriage and family is a collaborative coming together of equals. For me this is about having equal civil rights and protection for my family. If you don't like the tax system fine. If you prefer a flat tax or some sort of libertarian tax system, just say so. Do you really need to p**p all over somebody else getting something a little closer to what they fairly should've been getting all along (under the current law)? I'd be nice if you could be a little supportive for all the families this will help.

And about Linda and Jessica, I haven't looked at this years tax tables but we were in that kind of situation enough years for me to be pretty darn sure that they would come out ahead. Linda with the kids to claim, will be claiming $500 less which will increase her Earned Income Credit, esp with 2 children. Jessica will have to claim $500 more but she won't pay Social Security tax on it. Not sure these days what that might do to her EIC eligibility. But any loss should be more than offset by Linda's gain, so the family would be better off. Unfortunately, they will be burdened by the same sucky paperwork and regulatory confusion I mentioned above, and possible cash-flow hardship if they have to pay taxes up front to get what they are owed from previous years.

What I would love to see about that is for some big civil rights org like HRC or LAMBDA or NGLTF to come forward and offer actual pro bono or low cost tax preparation services and assistance with the IRS challenges that may occur for these families, perhaps in coordination with lgbt & ally financial professionals.


David Stein | March 16, 2011 8:10 PM

Simple question:
(1) Suppose my (CA married) spouse and I combine and average our incomes and each reports 50% on the "filing single" return.
(2) We do the same for itemized deductions, each claiming 1/2 allowable amount.

(3) Then each of us mail the Federal return in to the IRS.

(4) Questions: (a) How does the IRS know one return is related to the other? (b) Should I include a nice little note about the relationship? (c) What do you suggest?